Starting a business can be a daunting undertaking, and one of the most stressful parts of hanging out one’s shingle is the financial undertaking required. When you decide to strike out on your own as an entrepreneur, you may wonder how you’ll finance everything. Many people turn to personal loans to get their businesses off the ground. But how does one use personal loans to their advantage without creating a potential financial mess?
“What method may work best for your situation depends on a number of factors,” says Marlo Richardson, a serial entrepreneur who owns Stage 21 Bar and Lounge in Culver City, CA. She is also one of the only female entrepreneurs licensed to own and operate a cannabis grow op in California, and is the founder of Business Bullish, a website and resource that seeks to train people in the areas of financial literacy and entrepreneurship. “While personal loans have definite benefits, some of their negative aspects may throw up roadblocks on your entrepreneurial journey.”
Recently, we asked Richardson to explain the pros and cons of using personal loans to start a business. Here is some guidance she offered on the varying approaches to financing your new venture.
Know the Rules Before Applying
It’s essential to know how personal loans differ from other types of loans before you sign on the dotted line. With a personal loan, any breach of contract could enforce a clause that would require the loan to be paid back immediately.
“In most cases, you want to avoid using personal collateral when funding your business,” Richardson says. “In addition, business loans typically allow for repayment over a long period of time. Personal loans usually have shorter repayment terms, and also tend to have higher interest rates. Make sure you read all the terms and fine print before agreeing to a personal loan.”
Know the Benefits of a Personal Loan
Personal loans do have their benefits for small business owners. “The most significant advantage is quick access to funds,” Richardson tells us. “Personal loans are easier to apply for than business loans, which means faster cash in hand.”
Personal loans can also be more flexible than business loans regarding how you can use the money. Not only can you utilize your personal loan funds for direct business expenses, but you can also apply them towards indirect expenses. For example, a new, fancy wardrobe to wear to meetings with high-end clients may not be a direct business expense, but it can indirectly help your business and is something that can be purchased with personal loan funds.
Know When to Think Twice Before Taking Out a Personal Loan
Although there are several benefits in using personal loans to fund your business, there are reasons to think twice before choosing that route to fund your venture. “Personal loans are just that — personal,” says Richardson. “They are attached to you personally. Therefore, if you were to default on your personal loan, it could ruin your personal credit. That would affect your ability to buy a home, buy a car, and get credit in the future.”
In addition to these caveats, failing to pay back a personal loan could lead to a lender’s judgment against you or your personal assets. People have lost their homes and other assets as a result of their failure to pay back personal loans they take out to fund their business.
Business Credit Cards vs. Personal Loans
If you are seeking a preferred way to fund your new business, you may consider getting a business credit card over a personal loan. Business credit cards allow you to have a revolving line of credit that is not fixed with payments. It can be used over and over again for business expenses. Personal loans have a fixed amount and interest rate. Typically, once you use your personal loan and pay it off, you would have to reapply for a new loan to continue having that money available. Lastly, many business credit cards allow you to build up “points” that can be used for things like travel.
“When starting a small business, you’re bound to have a variety of questions about finances,” Richardson says. “It’s probably one of the most critical aspects of building a business. My advice to new entrepreneurs is to build yourself up as a person, personally and professionally, who understands business. If you have a solid credit history and a good head for business on your shoulders, people will be more likely to loan you money.”
At the end of the day, Richardson strongly believes in utilizing “OPM” — Other People’s Money. When starting a business, you should first use funds that don’t come from your personal assets. Once you start rolling and generating profit from your venture, the use of “OPM” will be a boon to your business and bolster your eventual success.
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